The harshest so far has been the latest round introduced in January, consisting of further hikes in the seller’s stamp duty and reductions in mortgage loan-to-value ratios.

The cooling measures have caused cracks in the market. Private residential sales volume and price gains have recently slowed and we see potential downside for prices in Singapore. Mass market private properties, which have led the current recovery, could fall 10 to 15 per cent this year, while prime properties could lose zero to 5 per cent. Our cautious outlook is predicated not only on the harsh cooling measures but also on a number of structural drivers of the current recovery that we believe could turn negative over the next one to two years.

Current recovery driven by a confluence of supportive factors

With little doubt, Singapore’s strong economic growth and record-low interest rates have been the two main drivers of the residential property market recovery. The stellar 14.5 per cent gross domestic product growth last year has resulted in strong employment conditions and higher salaries, which in turn boosted home demand. Meanwhile, record-low interest rates have helped keep mortgages affordable despite rising property prices.

Another driver for the recovery has been Singapore’s steady population growth. From 2000 to 2009, Singapore’s successful repositioning as a global city and its liberal immigration policy ushered the population to grow from 4 million to 5 million – an annual growth rate of 2.4 per cent.

Amid this steady increase, the supply of residential property units actually plummeted. In 2000, about 37,000 homes were completed, of which some 28,000 were Housing and Development Board (HDB) flats, and 9,000 were private residential units. However, the total number of completed units fell to a low of around 9,000 in 2006 (HDB 3,000; private residential 6,000), and a still-paltry 17,000 in 2009 (HDB 7,000; private residential 10,000).

The culprit, in our view, was the HDB’s adoption of the Build-to-Order scheme in 2001, which significantly slowed down the HDB flat construction process.

Supportive factors expected to wane

We believe these market supportive factors will wane. Singapore’s economic growth is expected to slow down to between 4 and 6 per cent this year as export growth tapers off, and employment and income growth, though healthy, may not be as strong as last year.

And while interest rates could remain depressed, they will not stay low forever. In recent speeches, United States Federal Reserve officials have reignited market concerns about the end of quantitative easing and the eventual tightening of monetary policy.

Given that Singapore interest rates tend to follow US interest rates, the day of reckoning for mortgages in Singapore may not be far away. UBS expects the Fed to start hiking rates in the first quarter of next year, which means Singapore interest rates could also rise early next year.

The Government has also tightened some of its permanent residence policies, resulting in a drop in the annual population growth rate to 1.7 per cent last year. Foreign worker levies will also be raised further as announced in this year’s Budget. All this would mean that population and housing demand growth should slow.

In addition, the HDB has been very active in launching new supply of public flats over the past year and this should result in a significant increase in completed HDB flats by late 2012 or early 2013. We estimate that 16,000 HDB flats would be completed in 2013.

In the private residential property market, the Urban Redevelopment Authority has been actively launching new sites, especially mass market ones in suburban areas, through both its confirmed and reserve lists. This should help address the residential property supply shortage that has built up in recent years.

For these reasons, we expect Singapore residential prices to decline. For potential home-buyers, this means a potential price relief. For investors, better returns could be achieved this year from office and industrial property exposure, where rentals have continued to rise recently driven by healthy occupier demand.

By Tan Chin Keong – analyst at UBS Wealth Management Research